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22 January 2014

Singapore Real Estate News

Parco to quit Millenia Walk after losing millions there

Source: Business Times / Top Stories

Japanese mall
and department store operator Parco will be vacating its 83,000-square foot
premises at Millenia Walk late next month, after racking up losses over the
years which run to millions of dollars. The Business Times understands that its
lease ends in March and that it is looking to continue operations in another
mall, though this is likely to be on a smaller scale, with about 10,000 sq ft
of space to accommodate its food, cafe and restaurant operations. These are largely located on the third level of the department store currently, said to be the only part of Parco that is doing well.

Pontiac Land Group, which owns and manages Millenia Walk, is in the midst of working out plans for the space that Parco will leave behind. It revealed that no other tenant was leaving apart from Parco.

Said Michael Su, CEO of Pontiac Land: "We will be taking Parco's departure as an opportunity to reposition and focus on a renovation and enhancement exercise. In Q2, we will unveil exciting plans for the mall."

Talk in the market is that Pontiac is considering converting the retail space for hotel use, as those it owns in the area, such as Conrad Centennial Singapore and the Ritz Carlton Millenia Singapore, have been performing well. The site Millenia Walk sits on is the same parcel of land that houses the Ritz Carlton and Conrad Centennial Singapore. It has been zoned for hotel use under the Master Plan 2008.

But Mr Su dismissed such talk, saying: "We view retail as a viable business and with Parco's departure, we are taking this opportunity to reposition our mall."

Parco's departure from Millenia Walk comes after it chalked up millions of dollars in losses after tax from continuing operations each year since it moved to the mall in 2010. In 2011, it incurred as much as $8.7 million in losses, filings with the Accounting and Corporate Regulatory Authority (Acra) showed. In 2012, it made a loss of $3.4 million.

Its performance over the past few years contrasts sharply to the time when it first started here in 1995. At that time, it managed what was known as the Parco Bugis Junction shopping complex and a department store at the mall.

Some market observers had predicted that it would not do well, but Parco Bugis Junction managed to register sales of $110 million in its first full year and more than $22 million in rental revenue.

Parco sold its stake in Bugis Junction in 2005, and was the appointed retail manager for The Central mall at Clarke Quay between 2006 and 2009.

The Singapore department store is fully owned by Parco Co Ltd, which has 19 stores in Japan, where it has built a strong reputation for creating successful, bustling shopping complexes out of the most unlikely locations.

Its store at Millenia Walk covers three floors; it includes popular ramen joints such as Keisuke Tokyo and Nantsuttei and restaurants such as Saboten, Tomi Sushi and Ma Maison, which are located on the top floor.

Parco is also involved in a fashion design incubator project called Parco next NEXT, where local designers undergo a structured training and mentorship programme and set up shop on the second floor of the department store.

This is a joint initiative between Parco and the Textile & Fashion Federation (Singapore) (TaFf), with support from government agency Spring Singapore.

But designers who have set up shop there complain that sales have been poor.

Said one designer, who declined to be named: "We are doing very badly. There are very few customers. It's practically a ghost town."

In response to BT's query on the Parco next NEXT programme, Spring Singapore said it was launched in 2010 and will "run to its fruition" till March this year.

Going forward, Spring Singapore will continue to help local designers by leveraging on alternative or existing avenues, added Ms Yeo.

"New-to-market designers who are interested to start their own business can tap the ACE start-up grant. Designers who are keen to gain working experience in the fashion industry can go through TaFf to be matched with suitable local fashion companies.

"Spring Singapore will work with existing designers who remain committed to grow in the fashion industry both locally and internationally. Furthermore, designers can seek Spring's support to upgrade their business capabilities using Spring's Capability Development Grant (CDG)."

-By Feldra Chay

S'pore scores in efforts to improve home affordability

Singapore
homes remain "severely unaffordable" despite efforts to improve
affordability, a survey has found. But the city-state achieved "stellar
results", unlike Hong Kong and Vancouver, where home prices have spiralled
out of control. The 10th Demographia International Housing Affordability
survey, which studied housing prices in 360 metropolitan markets across nine
nations, including Australia, Canada, Ireland, Japan, New Zealand and the US,
rates housing affordability based on the median multiple.

Jekyll and Hyde interest in launches reflects
market uncertainty

Source: Today Online / Business

SINGAPORE — The uncertainty surrounding Singapore’s private property market was highlighted over the weekend, with two launches achieving very different sales results: The Hillford retirement resort in Jurong completely sold out on the first day, while The Panorama condominium in Ang Mo Kio managed to sell only half of the units released.

Analysts said the contrasting fortunes of the two properties did not come as a surprise, citing a market backdrop where buyers are now more selective and sensitive to prices as cooling measures continue to dampen sentiments.

All 281 units of The Hillford were snapped up on the first day of sales on Friday because of attractive pricing and its unique offering, PropNex CEO Mohamed Ismail said.

“Hillford did exceptionally well because the quantum was so much lower, with the bulk of its units priced between less than S$500,000 and S$700,000. Marketed as a retirement resort, it also benefits from being the market’s first and only product of that nature,” he said.

“Therefore, despite its lease being a shorter 60-year, The Hillford was a draw not only for retirees, but also permanent residents and young buyers with an investment angle,” Mr Ismail added. “On the other hand, The Panorama is one of several similar offerings in the market. Buyers are more selective to the dollar they want to put on The Panorama, because they have alternatives in either the resale market or other new launches.”

With prices from more than S$600,000 to about S$2.8 million, The Panorama sold 60 of its 120 first-launch units — or about 10 per cent of its total 698 units — on Sunday. SLP International’s research head Nicholas Mak agreed that the latest project by Wheelock Properties was held back by its prices in a competitive market.

“Buyers are getting increasingly price-sensitive, in terms of both per-square-foot prices and quantum. With cooling measures such as the new Total Debt Servicing Ratio (TDSR), people are concerned about how big a loan they can get based on their income. That’ll certainly influence a decision between something over S$1 million or S$500,000.”

Along with TDSR, the Additional Buyer’s Stamp Duty (ABSD) was also substantially increased in January last year, making expensive units even less accessible.

These regulatory pressures, combined with seasonal weakness, drove last month’s new private home sales to a five-year low, the latest figures by the Urban Redevelopment Authority showed. Developers sold only 259 units last month, down 80 per cent from the 1,410 units sold in December 2012, the data showed.

Against this backdrop, The Panorama’s sluggish initial sales reflected a market trend that is putting greater emphasis on affordability.

“Unfortunately, due to land and construction costs, Wheelock wasn’t able to price The Panorama lower. But it’s a good product from a good developer — I believe it can take its time to sell,” Mr Mak said.

Wheelock Properties’ Senior Executive Director Tan Bee Kim shares the optimism, saying: “Although the dampening effects on the Singapore property market brought about by the Government’s cooling measures are still being felt, the recent World Bank economic forecasts augur well for Singapore.

“Hopefully, we may be looking at a more upbeat market sentiment and sustainable recovery.”

- By Wong Wei Han

2 S'pore developers unveil overseas residential projects

Source: Straits Times

Two Singapore
developers yesterday unveiled plans to develop sites overseas for residences.
Stamford Land Corporation has lodged an application to redevelop a heritage
site in Sydney, Australia.The mainboard-listed company said in a statement that
the proposal for the development of 93-97 Macquarie Street, where its Sir
Stamford Circular Quay hotel currently stands, includes retaining and adapting
the former Health Department Building.

KEPPEL Land has acquired a residential site in West Jakarta for about $42 million.

The property group said yesterday that it would develop a high-rise condominium with more than 1,200 units, as well as about 60 ancillary shophouses, on the three-hectare site. This is part of Keppel's move to strengthen its foothold in Indonesia.

"Indonesia is one of Keppel Land's key growth markets where we will continue to build up our presence," Sam Moon Thong, president (Indonesia) of Keppel Land, said yesterday.

"We believe that Indonesia's steady economic growth, underpinned by strong fundamentals, will continue to support demand for well-located and affordable homes."

- By Jamie Lee

Foreign labour curbs too fast, too furious: survey

Source: Business Times / Top Stories

Two-thirds of businesses polled by KPMG believe the pace of economic restructuring, and in particular, policies to tighten foreign labour inflows, has been "too fast and too furious".

And if findings from KPMG's Pre-Budget 2014 Survey Report are to be believed, companies' attempts to tackle immediate business concerns (such as rising business costs and the manpower crunch) are stymieing their efforts to innovate.

Said Tay Hong Beng, head of tax at KPMG in Singapore: "A lot of businesses are burdened by short-term concerns of costs and labour. And that has come at the expense of value-creation activities (which are) extremely important for businesses in Singapore.

"Because of the size of the domestic market, Singapore businesses need to go abroad and venture into new markets as well, as they look into new ways of doing things (through) innovation."

- By Kelly Tan

Real Estate Companies' Brief

FCT's Q1 DPU rises 4.2% to 2.5 cents

Source: Business Times / Companies

FRASERS Centrepoint Trust has posted a distribution per unit of 2.5 cents for the first quarter ended December, an increase of 4.2 per cent from a year earlier.

Income available for distribution rose 4 per cent to $22.7 million. Taking into account cash retained ($2.087 million), this translates into distributable income of $20.6 million, a 4.3 per cent year-on-year increase.

For the quarter under review, net property income (NPI) rose 4.4 per cent to $28.3 million from $27.1 million. Gross revenue rose 5 per cent to $40 million.

MAPLETREE Industrial Trust's distribution per unit (DPU) rose 8.2 per cent to 2.51 cents for the third quarter ended December, from 2.32 cents a year ago.

This was on the back of distributable income rising 12 per cent, from $37.7 million to $42.2 million.

"MIT continued to deliver growth in distributable income, driven by higher rental revenue across all property segments and improved occupancy at the flatted factories," said Tham Kuo Wei, chief executive officer of Mapletree Industrial Trust Management, the manager of MIT.

Net property income rose 12 per cent to $55 million, while gross revenue rose 9.3 per cent to $75.6 million.

Outgoing
chief executive officer Christopher Calvert has delivered strong shareholder
returns over the last five years by re-modelling and resizing the portfolio he
inherited into one of the best-performing industrial Reits in recent years.
Cambridge Industrial Trust (C-Reit) has posted total shareholder returns
(including distribution) of 300 per cent since the beginning of 2009,
outperforming its peers and the wider STI market index.

SP Setia shares inch up as top execs quit posts

Source: Business Times / Malaysia

SHARES in Malaysia's largest property developer SP Setia rose 0.6 per cent to RM2.90 apiece yesterday, a day after its founder and another key executive said they would quit the group soon.

On Monday, the firm's board informed the stock exchange that Liew Kee Sin, SP Setia's president and chief executive, would step down by April, and that Teow Leong Seng, the group's chief financial officer, would follow suit at the end of July.

The exchange was also informed that Lee Lam Thye, a non-independent, non-executive director of the group, would quit immediately.

To allay investor concerns, the board appointed Voon Tin Yow, the firm's current chief operating officer, as acting president and chief executive. Khor Chap Jen, the group's executive vice-president, was named acting deputy president. The duo, appointed for a year, have been with the group since 1996.

- By S Jayasankaran in Kuala Lumpur

Views, Reviews & Forum

Being
practical about land-use balance

The Nature
Society is to be commended for its passionate advocacy of biodiversity, in
pressing for more of Singapore's land mass to be protected as nature reserves.
That human habitats should allow space for animal and plant life is not any
longer a fad promoted by tree-huggers, but is the essence of controlled,
liveable environments. It makes for the subtle difference between quality of
life and a high standard of living based on measurable indicators.

THE Hillford, a 281-unit retirement resort on Jalan Jurong Kechil, sold out within five hours at last Friday's launch. But make no mistake about it: if Sunday's sale of the Panorama condominium in Ang Mo Kio is anything to go by, the residential property market is weakening, in a welcome correction two years before interest rates are slated to go up. Just 60 of the 120 units released for sale at the 698-unit suburban condo project were booked. This translates to first-day sales of 8.6 per cent, which was hardly inspiring. Moreover, prices are said to be between $1,265 and $1,320 per square foot (psf) for various units. Yet when developer Wheelock Properties submitted the winning bid for the site last year, analysts calculated breakeven prices of between $1,180 and $1,300 psf. Again, when the developer does not seem to be enjoying a fat margin, the residential property market cannot be said to be red hot.

A cooling property market is not something to be unduly worried about, because a crash - a sharp fall of 15 per cent or more - is unlikely. Many cash-rich buyers are still waiting on the sidelines. Most Singaporeans buy homes to live in. And even though household leverage has increased in recent years, the percentage of overleveraged buyers is not alarmingly high - estimated by the Monetary Authority of Singapore (MAS) to be 5-10 per cent. Even when mortgage rates spike by three percentage points, overleveraged buyers will increase to only 10-15 per cent. Economists as well as analysts have pointed out that household cash balances remain strong. UBS's Kelvin Tay noted that with a $33 billion rise in CPF Ordinary Accounts from before the global financial crisis to June 2013, the majority of households are not recklessly leveraging, and credit growth alone does not imply a bubble.

But an unstated assumption is that economic growth will continue as usual. With global liquidity flows shifting from slowing emerging markets to recovering US and Europe, Singapore - battling high costs and limited productivity growth - will not be spared when the quantitative easing (QE) music stops. To ensure Singapore's economy is as strong as possible when liquidity outflows accelerate, the government's attention should be on shoring up the local small and medium-sized enterprises (SMEs) base. In the event of a downturn, SMEs will provide a much-needed buffer to ensure Singaporeans will still have jobs, even while larger multinational companies may have to shed workers to cut costs.

While the government has made efforts to cool the residential property market, it should examine ways to cool commercial rentals as well. Anecdotal evidence suggests some egregious examples of businesses forced out when landlords summarily doubled their rents. High rental costs, together with high labour costs, are detrimental to Singapore's productivity drive and dampen entrepreneurship. Larger enterprises have the power to negotiate more favourable terms, but smaller ones are price-takers. The local SME base cannot be ignored as Singapore restructures its economy.

Global Economy & Global Real Estate News

BlackBerry to Sell Most of Canadian Real Estate to Raise

Source: Bloombeerg

BlackBerry Ltd. (BBRY), the struggling smartphone maker, plans to sell most of its Canadian real estate to raise cash for its turnaround plan.

BlackBerry is working with CBRE Group Inc. (CBG) to sell vacant properties as well as occupied space it would then lease back from buyers, according to a statement today. The assets cover more than 3 million square feet (280,000 square meters), the amount of office space in the 104-story One World Trade Center skyscraper in lower Manhattan.

Chief Executive Officer John Chen, who took over in November, is revamping the company’s strategy to outsource manufacturing and return the target market to business users instead of consumers. Chen is working to steady the company after it ceded most of its smartphone market share to Apple Inc. and Google Inc.

“This initiative will further enhance BlackBerry’s financial flexibility, and will provide additional resources to support our operations as our business continues to evolve,” Chen said in the statement.

BlackBerry jumped as much as 6.4 percent in late trading after closing at $9.93 in New York. Through today’s close, the shares have climbed 33 percent this year.

Today’s announcement is the second major transaction Chen has completed since taking over. Last month, he struck a deal with Foxconn Technology Group to outsource the production and some of the design of BlackBerrys to cut costs and reduce its inventory risks.

BlackBerry didn’t disclose how much it expected to raise from the sale and Ricky Hernden, a spokesman for CBRE, declined to comment when reached by phone. BlackBerry finished last quarter with cash and short-term investments of $3.06 billion.

BlackBerry has about 40 locations in Canada and 78 elsewhere around the world, according to its website.

- By Hugo Miller and Katia Dmitrieva

Vornado Said to Seek Sale of New York’s 1 Park Ave. Tower

Source: Bloomberg

Vornado Realty Trust (VNO) is planning to sell 1 Park Ave., an office tower east of New York’s Herald Square, almost three years after rescuing the building from possible default, three people familiar with the offering said.

The real estate investment trust, which has interests in more than 20 million square feet (1.9 million square meters) of Manhattan offices, hired brokers Douglas Harmon and Adam Spies of Eastdil Secured LLC to market the 20-story, 925,000-square-foot tower, according to the people, who asked not to be identified because the details are private. New York-based Vornado is seeking about $650 million, two of the people said.

A sale at that price would demonstrate a surge in Manhattan office values and the profits to be had for investors who took positions in distressed real estate after the 2008 financial collapse. Murray Hill Properties LP and a unit of Cerberus Capital Management LP sold a 95 percent interest in 1 Park Ave. to Vornado in a 2011 deal that valued the property at about $427 million, according to data firm Real Capital Analytics Inc.

“If someone’s presented with a 50 percent opportunity over three years, you’re going to take it, most likely,” said Jonathan Mazur, director of capital markets research at brokerage Newmark Grubb Knight Frank, which isn’t involved in the sale. The building “needed a little love and attention. Vornado was able to do that, structure the property nicely, and now they can move on.”

Debt Retired

The 1920s-era building, located between East 32nd and 33rd streets, had about $250 million of securitized debt that was under the threat of “imminent default” early in 2011, according to servicer notes compiled by Bloomberg. The transaction with Vornado retired the debt, data from New York-based Real Capital show.Murray Hill Properties, whose president is investor Norman Sturner, kept a 5 percent stake.

Vornado rose 0.5 percent to $92.28 today in New York. The shares have gained 9 percent in the past year, compared with a 1.1 percent decline for the Bloomberg REIT Index.

After the 2011 deal, 1 Park’s largest tenant, New York University’s Langone Medical Center, agreed to extend its lease to 2041 and expand to 420,000 square feet, about half the building, according to data from CoStar Group Inc., a Washington-based research firm that tracks office leasing.

Building Upgrades

About 15 percent of the tower’s offices are listed as available, most of that for sublet, according to CoStar. The building is on the northern fringe of the area brokers call midtown south, where demand by technology and media firms has driven vacancies to a national low. Aside from Langone, the tenant roster at 1 Park is made up mostly of financial institutions, business services and wholesalers.

Murray Hill Properties and Cerberus spent about $15 million renovating the building, including upgrading the lobby and elevators, said one of the people familiar with the plans for the tower. Its lobby features ornate barrel-shaped chandeliers hanging from vaulted ceilings and marble-clad elevators. It was designed by the firm York & Sawyer, which also designed the Federal Reserve Bank building in lower Manhattan, according to property-information site Emporis.com.

Midtown Manhattan office prices have doubled since hitting bottom in late 2008, according to a Jan. 7 report from Green Street Advisors Inc., a Newport Beach, California-based research firm that tracks values of properties owned by REITs. Values are about 10 percent below their mid-2007 peak.

Record Sales

New York City commercial-property sales may reach $63 billion this year, almost doubling last year’s $37.6 billion total and breaking the record set in 2007, according to a report last week from Massey Knakal Realty Services, a New York-based brokerage that arranges mostly commercial-building sales. The average Manhattan office building sold for $952 a square foot in 2013, up 29 percent from a year earlier.

Harmon and Spies of Eastdil also represented Time Warner Inc. in last week’s $1.3 billion sale of the media company’s headquarters space at Time Warner Center to a group led by Related Cos. They also brokered last year’s biggest single-building transaction in the U.S., a $1.3 billion deal for midtown Manhattan’s 650 Madison Ave.

- By David M. Levitt

U.S. Bancorp Encroaches on BofA as Davis Seizes Market Share

Source: Bloomberg

When Brian T. Moynihan was asked at a November panel discussion who he worried would steal his customers, Bank of America Corp. (BAC)’s chief executive officer looked to the man seated on his right.

“Richard,” he said, nodding to U.S. Bancorp CEO Richard Davis, drawing laughter from the bankers and regulators in the New York ballroom. Then it was William Demchak’s turn to answer. “Yeah, I’d say Richard,” said Demchak, the head of PNC Financial Services Group Inc.

Under Davis, U.S. Bancorp has increased market share in more than a dozen business lines since 2007. The nation’s largest regional lender beat the four biggest U.S. banks in key gauges of management prowess for most of 2013, including return on equity, return on assets and cost controls. Analysts are predicting more of the same when the company reports full-year results tomorrow.

By stock-market valuation, Davis has already outdone his larger rivals with shares that trade at about 3.3 times tangible book value, more than any of its peers. That’s raised doubt about how much higher it can go. Fewer than half of the 39 analysts following U.S. Bancorp rate it a buy, and Atlantic Equities LLP’s Richard Staite has the equivalent of a sell with a price target lower than the current level.

Earnings Estimates

The bank probably will say annual net income fell about 2 percent, or a 5 percent gain on a per-share basis, according to estimates compiled by Bloomberg. While fourth-quarter profit declined about 3 percent, according to the data, Staite predicted in a Dec. 19 note that the period will include a 16.2 percent return on equity and a 1.59 percent return on assets, the highest among the biggest commercial banks.

“It’s very hard to see how they’re going to improve from an already impressive level,” Staite said. “There are other banks that are going to see their earnings improve at a much faster rate.”

The quarterly report may show whether U.S. Bancorp will continue to outpace peers whose attention is shifting from credit-crisis fallout to the nation’s improving economy. One area of focus for analysts is mortgage revenue, which the firm has said may slide 30 percent from the third quarter as lenders grapple with rising interest rates. A drop in earnings from home loans and corporate payments and an increase in taxes could cause results to miss estimates, Matt O’Connor, a Deutsche Bank AG analyst, said in a Jan. 3 note with a hold rating.

Retail Concentration

Davis, 55, has never posted an annual loss during his seven-year tenure as CEO of the Minneapolis-based firm. He’s done it while eschewing investment banking and riskier assets to concentrate on retail customers and the corporate trust business. He’s also avoided the worst of the mounting legal costs that plague larger peers. With regulators pressing banks to become simpler and safer, U.S. Bancorp is being held up by investors and analysts as a model for how lenders should be run.

“We need more U.S. Bancorps,” said David Ellison, a money manager for 30 years who runs the Hennessy Large Cap Financial Fund, which has beaten two-thirds of its peers for the past five years. “We’re in a significant period of flux in the industry that is unprecedented in my lifetime,” he said. “So I want to own the better management.”

Davis has been able to concentrate on growth while competitors were consumed with “resolving legacy issues,” analysts at Goldman Sachs Group Inc. said in a Dec. 3 report with a buy rating. Legal expenses and claims over shoddy mortgages have cost the six biggest lenders more than $114 billion since 2007, and probes and new regulations like the Volcker Rule have put pressure on revenue.

Moynihan has signaled that Bank of America’s focus is shifting from a four-year legal cleanup toward making the Charlotte, North Carolina-based firm’s operations more competitive. His bank and JPMorgan each have four times the staff of U.S. Bancorp and at least six times more assets.

U.S. Bancorp’s shares have climbed 21 percent since Davis became CEO in December 2006, compared with a 38 percent drop in the 24-company KBW Bank Index. (BKX) The stock didn’t fall as sharply during 2008’s credit crisis and is the only one in the index to post four straight annual gains through 2013. Still, U.S. Bancorp’s 26 percent advance last year was the index’s fourth-worst performance. Some competitors were rebounding from deeper troughs after the crisis.

Not ‘Flashiest’

“They are not going to be the flashiest company, they are not going to be the fastest-growing company, but they are going to be one of the most consistent companies,” said Tom Brown, CEO at Second Curve Capital LLC, a New York hedge fund that invests in banks and counts Davis as an adviser.

Davis’s firm ranks fifth by deposits and assets among commercial banks and has outpaced its larger peers every quarter for more than three years by return on equity, or how well it reinvests earnings, and return on assets, a gauge of how much profit a firm can squeeze from holdings. The bank had the best efficiency ratio, which shows how much a company spends on overhead, in that time, data compiled by Bloomberg show.

Its net interest margin, the difference between what the company pays for funds and earns on loans or investments, probably exceeded those of Bank of America, JPMorgan and San Francisco-based Wells Fargo & Co. (WFC) in 2013, according to Staite.

Market Share

U.S. Bancorp has added market share since 2007 in fund services, credit cards, mortgage origination, deposits, commercial and industrial loans and commercial real estate loans, the firm said in a Dec. 11 presentation.

“I wouldn’t day-trade our stock; we are steady and consistent,” said Davis in a Nov. 21 interview. His firm’s competitive advantage is its ability to increase market share while avoiding new risks, Davis said. “Our competitors are looking at their balance sheet, but we are focused on fees, trust, payments.”

His first banking job was as a teller. He earned his bachelor’s degree in economics at California State University, Fullerton. As an executive vice president at Star Banc Corp., he oversaw its 1998 merger with Firstar Corp. Three years later, he oversaw that firm’s combination with U.S. Bancorp, where he held posts including chief operating officer before becoming CEO.

U.S. Bancorp has steered clear of subprime mortgages and shunned proprietary trading. That’s a plus, according to Matthew McCormick, who oversees $10.5 billion including bank stocks at Bahl & Gaynor Inc. of Cincinnati.

Whale Hunting

“There’s not a London Whale swimming in U.S. Bancorp’s closet, and they are not going to have a huge legal reserve that is taking from dividend growth,” McCormick said, referring to New York-based JPMorgan’s $6.2 billion loss in 2012 on outsize derivatives bets by a trader known as the Whale.

While Bank of America and Citigroup Inc. are closing offices, U.S. Bancorp added 94 branches to its network of more than 3,000 with a Chicago acquisition last month. Deposits have jumped 88 percent since 2008, compared with an average 69 percent for the four largest banks, and assets rose 46 percent to $360.7 billion, compared with 39 percent for the Big Four.

“We are still boring,” Davis said, using his buzzword for relying on conventional banking. “Boring means we won’t get in and out of stuff we don’t know.”

Testing Rivals

The strategy has helped U.S. Bancorp stand out as U.S. regulators seek ways to make institutions safer by forcing them to hold more capital and curb risk-taking activities.

“From the standpoint of how you manage a company, U.S. Bancorp would be the model,” said Second Curve’s Brown. Davis has “struck a balance of risk and growth that regulators want to see.”

Since the 2008 credit crisis, regulators have clashed with lenders over stress tests, dividends and liquidity. Authorities also have demanded firms produce “living wills” to show how they can be dismantled if they’re near collapse.

“Big banks are going to be forced to become more conservative, which is a boon to U.S. Bancorp,” said Greg Donaldson, chairman of Evansville, Indiana-based Donaldson Capital Management, who invests in large U.S. banks. “They are seen as the good guys.”

Earnings Diversity

Spokesmen for U.S. Bancorp and its larger competitors declined to comment for this article. U.S. Bancorp also has faced regulatory probes of its own, including a dispute with Freddie Mac that was settled last month for $53 million.

The company still has “earnings and geographic diversification of a larger bank without being subject to some of the most binding capital constraints,” Goldman Sachs’s Richard Ramsden said, referring to tougher curbs on leverage that pertain only to bigger firms.

That’s good reason for rivals such as Bank of America’s Moynihan to worry, according to Donaldson.

“You’d be fearful, too, if U.S. Bancorp moved into your territory,” he said.

- By Elizabeth Dexheime

Scaramucci’s SkyBridge Gains 38% Keeps Housing Bets: Mortgages

Source: Bloomberg

The U.S. mortgage market has been very good to Anthony “the Mooch” Scaramucci.

In the past few years, the Federal Reserve’s unprecedented stimulus contributed to some of the biggest returns for money managers investing in mortgages. Then housing prices soared, lifting the most beaten-up home-loan securities. And Scaramucci’s SkyBridge Capital, which invests $6.2 billion in hedge funds, was along for the ride. Mortgage investments fueled returns of about 38 percent over the past two years, about triple the industry average.

Even with SkyBridge now calling the stock market the best place to generate returns, its second biggest strategy is mortgages, which make up 38 percent of allocations, down from 70 percent a year ago, though still one of the highest for investors that farm out money to hedge funds. After benefiting as the Fed intervened in financial markets with low interest rates and bond buying, SkyBridge sees opportunities in government-backed mortgage debt during the retreat and is sticking with housing market wagers.

“We still like mortgage-backed securities,” said Troy Gayeski, a partner at New York-based SkyBridge. Returns of 6 percent to 10 percent are likely from non-government backed debt as real estate continues to recover, he said, although the “violent move up in housing has already occurred.”

Biggest Windfalls

The firm invests with managers such as Axonic Capital LLC, Seer Capital Management LP and Ellington Management Group LLC, returning more than 14 percent last year after gaining about 21 percent in 2012, according to regulatory filings and investor notices. The industry on average returned 7.4 percent in 2013 and 5 percent the prior year, according to the Bloomberg Hedge Funds Aggregate Index.

SkyBridge, founded in 2005 by Scaramucci, 50, got the biggest windfalls two years ago from managers who traded and invested in the $5.4 trillion market for government-backed agency mortgage securities such as Fannie Mae and Freddie Mac-guaranteed bonds. The following year, managers in the $800 billion non-agency market were the biggest winners in the mortgage market as house prices jumped by the most since 2006.

Last year, managers that trade U.S.-backed housing debt struggled as investors speculated the Fed would slow its debt purchases and concern grew that Obama administration policies and rising home prices would make it easier for certain homeowners to refinance, reducing the value of their investments. Gayeski said agency mortgage managers can now benefit from bets against the debt as the central bank retreats.

Rising Rates

The funds also can make about 10 percent to 15 percent annual income from bets on investments known as inverse interest-only notes, he said. Rising borrowing costs could lessen the impact of policies that enable wider refinancing, since it’s less worthwhile for borrowers to replace their mortgages.

“As interest rates go materially higher, the political risk is less of a concern,” he said.

The average rate for a 30-year fixed mortgage has risen to 4.41 percent from 3.35 percent in May, according to Freddie Mac.

In the non-government-backed market, “if you’re expecting to make 15 percent to 20 percent, that’s not going to happen, it’s just not mathematically possible” anymore, though above-average returns are still achievable, said Gayeski.

Goldman Sachs Group Inc. forecasts U.S. home prices will increase 4 percent this year.

Paulson Allocation

SkyBridge directed $490 million from its main fund to John Paulson’s funds in the six months ended Sept. 30, regulatory filings show. It cut holdings in the Pine River Fixed Income Fund, JLP Credit Opportunity Cayman Fund Ltd. and pulled all $60 million it had in the SPM Core Offshore Fund Ltd., which invests in mortgages.

Over the past three years, Pine River Capital Management LP has diversified beyond the residential mortgage-bond specialty that had propelled much of its growth since the financial crisis, saidColin Teichholtz, Pine River’s co-head of fixed-income trading.

“That’s not to say there’s not a great opportunity set in mortgages,” he said. “It’s just not a complete capital vacuum to the same degree that it was going back a few years.”

Pine River also sees non-agency returns being limited by higher prices and slower gains in home values, and the Fed’s retreat from the agency market potentially creating dislocations, he said. The firm’s $3.4 billion fixed-income fund gained about 10 percent last year, an investor notice shows.

Targeted Markets

Even if U.S. property appreciation slows or reverses, investors such as Ellington that are analyzing specific markets can benefit as areas such as some Florida markets catch up after lagging behind, Chief Executive Officer Michael Vranos said.

“We don’t think about national home prices: We think about hundreds of separate markets and economies,” said Vranos. His Old Greenwich, Connecticut-based company’s flagship Credit Opportunities Fund and similar accounts, with $2.9 billion of assets, returned about 15.5 percent in 2013, according to a person familiar with the results, who asked not to be named because the returns are private.

Many of the mortgage hedge funds started up during or after the crisis are diversifying beyond beaten-down residential securities as they mature. Seer Capital, which oversees $2.2 billion, last year increased its investments in debt such as European small-business-loan bonds, commercial mortgage-backed securities and collateralized loan obligations and began buying soured mortgages not packaged into bonds.

Supply Dynamic

“The supply and demand dynamic has shifted in their favor” relative to securities backed by the debt, said CEO Philip Weingord.

The New York-based firm’s main fund returned 12.2 percent last year, according to a person familiar with the results.

Returns of 20 percent or more in securitized debt are unlikely after the rallies, said Clayton DeGiacinto, chief investment officer of Axonic, a $2 billion structured-credit asset manager based in New York. Hedge funds can still make above-average returns by investing in and trading the securities partly because of new rules that are restraining banks’ activity, he said.

“We’re never going to go back to the way the market was in 2006,” said DeGiacinto, a former Goldman Sachs trader. “Those days are long gone.” His main fund returned more than 12 percent in 2013, a person familiar with the results said. With banks pulling back, it’s become easier for “holders like us, who’ve built up an expertise in this asset class.”

Alternatives Conference

SkyBridge’s annual SkyBridge Alternatives Conference is the largest annual U.S. symposium for hedge funds. Scaramucci’s ability to network and draw big names to the annual event has earned him the nickname “the Mooch” in the hedge-fund industry.

SkyBridge is often asked why it doesn’t devote more attention to managers looking to invest in areas such as distressed European assets, according to Gayeski. Mortgage managers are a big reason why.

“The answer is the remaining opportunity in mortgage-backed securities,” he said. Those “we believe offer equally compelling returns, with more liquidity and less dependence on an economic rebound.”

- By Jody Shenn and Katherine Burton

Buyout Firms Shift to German Offices From Housing: Real Estate

Source: Bloomberg

Blackstone Group LP (BX), the private-equity firm that cashed in on Germany’s booming housing market last year, plans to join the ranks of investors shifting money into the country’s commercial properties, where financially-strapped owners are under pressure to make deals.

Investors from insurers and pension funds to buyout firms last year spent the most on German offices, stores and warehouses since 2007, broker Savills Plc estimates. Blackstone and its competitors want to join the acquisition spree even as values increase.

“Residential is getting too expensive and they’re using the peak to liquidate,” said Fabian Klein, the Frankfurt-based head of German investments at CBRE Group Inc. (CBG) “There’s clearly more interest from opportunistic investors” in commercial-property deals.

Private-equity firms accounted for 3 percent of the 30 billion euros ($41 billion) that investors paid for German commercial real estate in 2013 and that will probably climb to 10 percent this year, London-based Savills said. Demand is rising in anticipation of new properties becoming available as banks and cash-strapped owners sell distressed assets.

In December, Blackstone agreed to buy three warehouse properties in Germany for about 100 million euros, a person with knowledge of the matter said. The seller is CS Euroreal, a Credit Suisse Group AG (CSGN)mutual fund that’s in liquidation, said the person, who asked for anonymity because the deal hasn’t closed. Blackstone and Credit Suisse declined to comment.

Benson Elliot Capital Management LLP, a U.K.-based private-equity real estate firm, in December made its first commercial-property purchase in Germany since 2006.

$11 Billion Fund

Blackstone’s real estate business has stepped up investments since 2008, when it raised an $11 billion fund to purchase buildings around the world. Last year, the New York-based company raised $13.3 billion to create the biggest opportunistic property fund. The company has been investing in European real estate for almost two decades and in 2012 it founded LogiCor, a European warehouse owner and operator.

As part of that strategy, Blackstone wants to double its European warehouse holdings within two years. The company’s been slow to enter the German logistics market because prices are higher than in other countries, Jonathan Lurie, a London-based managing director in charge of Blackstone’s European property investments, said in an interview. The company’s also looking for retail properties, he said.

Falling Yields

Yields for the best logistics properties in Germany’s six largest cities declined to an average of about 6.6 percent in the fourth quarter from 6.9 percent a year earlier, according to data compiled by Jones Lang LaSalle Inc.Lower yields indicate that prices are increasing.

“The market has of course increased in value, but there remain opportunities to invest in properties where further work is required on stabilizing or improving occupancy,” Lurie said.

Blackstone and Apollo Global Management LLC (APO) were among the private-equity investors that sold German housing assets in 2013 as prices rose for a fifth year. Apartment values climbed to the highest since at least 2003 in the third quarter, according to the VDP Association of German Pfandbrief banks, even as buyout firms made fewer acquisitions.

Last year, their share of residential property investments declined to about 6 percent of the total from 13 percent in 2012 and as much as 50 percent in the years leading up to the financial crisis, Savills estimates.

‘Well-Capitalized’

Blackstone in April agreed to sell 6,900 Berlin apartments to Deutsche Wohnen AG and is in talks to sell its stake in 30,000 homes held by Vitus Immobilien Sarl. In July, Apollo sold a stake in residential landlord Deutsche Annington Immobilien SE.

The increased appetite for commercial deals is underpinned by the strength of the German economy, the largest in Europe. The Bundesbank in December projected growth of 1.7 percent in 2014 and 2 percent in 2015, saying the economy was in “good shape.” Last month, German investor confidence rose to the highest in seven years.

“Investors are more willing to take on commercial leasing risk than they were 12 or 18 months ago,” said Philipp Braschel, head of German investments at Benson Elliot. “The outlook on extending leases and on moderate rental growth is more positive than it was a year ago.”

Frankfurt Acquisition

Benson Elliot in December bought the Turmcenter, an office property in Frankfurt, from German state-owned lender Landesbank Baden-Wuerttemberg. The firm expects to be a net buyer of commercial real estate in 2014, and has been a net seller of homes since 2012. In July it divested 360 Berlin apartments.

Private-equity investors in particular are attracted to commercial-property deals because more distressed properties are being offered for sale, said Andreas Wende, head of investments at Savills in Frankfurt.

Cheap commercial deals are more widely available in secondary locations, such as smaller towns or unpopular neighborhoods of large cities, Wende said. In contrast, prices for the best properties in popular locations have risen to record highs, he said.

Prime office yields in central Frankfurt, Germany’s financial capital, were 4.5 percent at the end of 2013, while yields for less attractive office buildings on the city’s outskirts were 6.4 percent, according to data from Savills.

Distressed Assets

Royal Bank of Scotland Group Plc in June sold an office building on the outskirts of Mannheim, a town the size of Cincinnati, to Activum SG Capital Management Ltd., according to the Jersey-based private-equity firm. The property became available after Morgan Stanley (MS) Real Estate funds defaulted on the debt, Activum Chief Executive Officer Saul Goldstein said. RBS and Morgan Stanley declined to comment.

“For us it’s a value-add situation,” Goldstein said. “We do our leasing work, we stabilize the asset and then we move it in a couple of years.”

Many of the properties targeted by private-equity firms are legacies of a two-year buyout boom that ended in 2007, when investors bought overpriced assets with small down payments, Wende said. As financing for these assets runs out, the properties are put up for sale by the lenders or the cash-strapped owners, Wende said.

“There are forced sellers who haven’t been able to achieve their asking prices,” Braschel said. “They’re simply ready now to take the haircut they have to take.”

Unwinding Loans

European banks have more than 200 billion euros of distressed German commercial property loans on their books that must be either sold or held until maturity, said Daniel Mair, a transactions adviser at Ernst & Young LLP in Frankfurt. German bad banks created to wind down loans formerly held by Hypo Real Estate Holding AG, Commerzbank AG and WestLB AG, have performing and non-performing loans valued at about 40 billion euros, according to data compiled by Bloomberg.

Banks that divested non-performing property loans last year include Wells Fargo & Co., which sold nine shopping malls to Cerberus Capital Management LP. In February, Lloyd’s Banking Group Plc agreed to sell loans on German supermarkets and home-improvement stores valued at about 400 million euros to New York-based investment firm Marathon Asset Management LP, a person with knowledge of the deal said. The person asked not to be identified because the information is private. Lloyds declined to comment and no one at Marathon responded to requests for a comment.

Liquidated Holdings

Another source of commercial-property deals will be seven German mutual funds that are liquidating their holdings after investors tried to withdraw more money than the funds had available. Funds including Credit Suisse Group’s CS Euroreal and SEB Asset Management (SEBINAI)’s ImmoInvest own more than 5 billion euros of offices and shops in Germany that by law must be sold by 2017, according to data compiled by Berlin-based research firm Scope Corporation AG.

The private-equity industry is unlikely to abandon Germany’s residential-property market altogether. Last year, buyout firms accounted for about 6 percent of all investments in the market, compared with as much as 50 percent in the years leading up to the financial crisis, Savills estimates. Even so, companies like Blackstone are still on the look-out for deals.

“Residential is a sector where we’ve had a lot of success for our investors, and that we have a strong appreciation for,” Lurie said. “We’ll try to find a way to stay active in it.”

- By Dalia Fahmy

Swiss Home Prices Are Approaching Level of 1989 Bubble, UBS Says

Source: Bloomberg

Prices in Switzerland’s booming housing market are approaching a level last reached in 1989, shortly before a slump in values that hurt the economy for years, UBS AG said.

Residential-property values are about 5 percent lower than the market’s peak when adjusted for inflation, the Swiss bank said in a report today. Even so, price increases slowed to less than the 10-year average in 2013 because of rising long-term interest rates and tougher mortgage-lending standards, UBS said.

“Despite slower momentum, valuations in the Swiss owner-occupied housing market have reached a high,” UBS economists Claudio Saputelli said at a briefing in Zurich today. “This has further increased the risk of a correction.”

The Swiss National Bank has sounded the alarm about the property market overheating in a bid to prevent a repeat of the real estate crisis of the 1990s. The UBS Swiss Real Estate Bubble Index rose to 1.20 points in the third quarter from a revised 1.15 points in the second, according to the most recent report in November. A reading above 2 would indicate a bubble.

“We’ve been in a risk zone for more than a year,” Saputelli said. Still, prices are rising more slowly than they did in the 1990s, he said.

The average price growth for condos was 3.5 percent last year, while single-family-home values climbed 4.5 percent, UBS said in its report.

Capital Buffer

The SNB has warned about an increase in risks in the country’s real estate market as record-low borrowing costs lifted demand and fueled inflation. the central bank initiated a capital buffer for banks that was introduced by the government in February 2013.

The buffer, which banks have had to comply with since Sept. 30, currently is set at 1 percent of risk-weighted assets tied to residential mortgages to guard against losses on loans. At the behest of the SNB, the government can raise it to as much as 2.5 percent.

According to Bloomberg’s monthly economic survey published today, 71 percent of economists expect the buffer to be raised, and more than half of those predicting an increase see that happening before the end of March. The median estimate is for the measure to be boosted to 2 percent.